The Battle for the Market’s Next Move Is Happening Now

Frequent stock market participants pay close attention when the price of the stock market indexes approaches the 200-day moving average. This trendline is seen as defining whether the market is in an uptrend or downtrend. With the proliferation of mechanical computer-driven trading, trading based on trendlines and other technical chart-based indicators has become quite prevalent. Witness below the emerging market ETF finding buyers multiple times at the black 200-day moving average line (circled).

The market finds itself this week back at that 200-day trendline in several of the major market indexes. Will buyers once again step forward and buy shares to keep the market’s uptrend intact? Indeed they did.

However, the picture is not quite a supportive when bonds are included. The downward push in bonds has already caused some funds more heavily focused on bonds to succumb and fall below the 200-day average. Vanguard’s Wellesley Income Fund, a well-known fund comprised of 60% bonds and 40% stocks, has slumped below the line for the first time in over two years.

One final point on the technical setup of this market. The chart below shows the S&P 500. The boxes highlight the past three efforts by the market to break higher and start a new uptrend. Three times these breakouts have brought in sellers to immediately push the market back down. The most recent effort occurred at a lower price, so sellers were even more eager to sell into the strength.

Charts show us the supply and demand in the market. At what price are buyers willing to buy in volume? At what price does selling predominate? We have highlighted above some of the points where buyers are willing to buy – e.g. the 200-day moving average – with their buying overwhelming sellers. And points where sellers are flooding out the buyers – e.g. on any meaningful breakout. At some point this equation will change with buyers or sellers gaining the upper hand and a new trend beginning. Given that the market has been in an uptrend coming INTO this period of consolidation (aka flat, range-bound trading), we would expect that the buyers will win this battle. That is unless there have been substantial new developments powerful enough to shift the sands and make selling the predominant force. This market is coiling up to make a move either way.

How does this all affect TimingCube? Our Turbo model is very actively trading the back-and-forth trying to capture small market moves. Last year, by contrast, Turbo sat for months letting the market’s uptrend deposit gains in our accounts. Turbo can be both a slow trend-following model and a fast short-term trading model. The goal is to keep our losses on losing trades small, and have more winning trades than losing trades. If we achieve that, then our account balances rise.

Market Update

Volatility in the stock market continued this week with investors continuing to sift through corporate earnings reports while also receiving fresh input from the Federal Reserve regarding interest rates. Stocks began the week poorly with a -0.8% loss despite good earnings from McDonalds (MCD) and a solid rebound from Apple (AAPL). Apple shares had fallen -8% over the prior couple of weeks as their component suppliers reported weakness in demand, which investors viewed as indicating that iPhone X sales were sluggish. Apple continued its recovery Tuesday ahead of its earnings report that evening. The Apple strength brought along other large tech firm shares leading the Nasdaq to a +0.9% gain. Apple shares vaulted higher overnight as the company gave investors just about everything they could want – better earnings, a huge stock buyback package, higher dividends, and an increase in the profit outlook. But stocks more broadly were disappointing as they gave up a midday rebound to finish with a -0.7% loss. The Federal Reserve offered no new information of note though the group acknowledged that inflation is nearing their 2% target. It appeared the fear of ramping inflation and the potential for slowing global economic growth might have underpinned the selloff. Stocks continued their sour tone early Thursday falling as much as -1.5% and undercutting the closely watched 200-day moving average. However, that moving average reference line brought in a flurry of buyers to bring the stock indexes back to post only a -0.2% dip on the day. Once again stocks opened the day lower Friday as weakness continued. Almost immediately, though, buyers stepped in to drive stocks higher throughout the day perhaps driven by word that Warren Buffett’s Berkshire Hathaway has added substantially to their stake in Apple. Apple’s shares gained almost +4% on the day giving a strong boost to the market indexes.

Friday’s burst of buying helped the S&P 500 recover to post only a -0.2% slip for the week. The small-cap Russell 2000 rose +0.67%. The Nasdaq 100 (QQQ) benefited most from the surge in Apple shares, gaining +1.72%. For the week Apple shares rose over +13% and were responsible for about 3/4 of the Nasdaq’s weekly gain. More indicative of the market’s generally weak tone, perhaps, was a -0.9% decline in the equal-weighted S&P 500 index.